2012 Scenarios: What if the Economy Heads Back Downhill?

Given the stunning weakness of the remaining Republican presidential candidates and the Tea Party Republicans in the House, and Obama's successful re-positioning as a pro-middle class populist, if the economy keeps getting stronger and stronger in the coming months, this election will turn into a Democratic sweep. This group of Republicans is so extreme, and so bad -- and so extremely bad, for that matter -- that what we all had been assuming would be an incredibly challenging election year for Democrats could yet turn into a great year for my party. For the country's sake, both on economics and politics, I hope with all my heart that this is exactly what it happens, and it just might.

However, both in economics and politics, it is incumbent on Obama's team to plan for the worst just in case, and to craft a message that will work in the fall no matter the economic trend lines. There are a couple of major reasons this is especially important.

The first is that while people are feeling modestly better about the economy, and know the job picture is improving somewhat, for most Americans they aren't feeling the economic improvements nearly as much as the pundits in D.C. think they are. For one thing, the overall jobs picture still isn't very good. 8.3 percent is still a bad number, even though it is a lot better than the worst of this Great Recession, as some economists are calling it. And that 8.3 percent is way understated in terms of the real situation. If you include workers too discouraged to look for work, people working part-time when they desperately want and need to be working full-time, and people "marginally attached" to the workplace wanting a job but haven't searched for one in the past four weeks because of lack of availability or skills or other reasons, the real unemployment rate is still 17.1 percent. You add to that fact that a lot of the new jobs are temporary and part-time jobs with no benefits or long-term stability while solid, steady full-time jobs are still in short supply. And wages are still not rising much at all -- in fact, a lot of the new jobs are at lower wages than the ones people originally lost, as many of the new jobs being created are in low wage industries. With unemployment still way too high, wages stagnant or declining for most workers, home prices still at abysmal levels compared to a few years ago, and prices for necessities like gasoline, health care, and groceries still rising way too fast, it is no wonder middle and working class voters remain in a very grumpy mood.

This is why when pollsters have tested various Obama speech lines, the ones where he is emphasizing good economic news play much more poorly than the ones where talks about battling for the middle class, or discusses his specific policy proposals, most of which people like. This lesson got drilled into me when I was in the Clinton White House in the 1994 election cycle, and it got drilled in again in 2010: when people aren't feeling good about the economy, a president telling them about the good statistical news and trends in it just doesn't fly. This is a very hard thing for presidents and their staff to accept -- it is the most natural thing in the world to want to tell voters about all the good things you have done, and how things are going well. But if people aren't feeling it, it doesn't matter how good your sales pitch is, it will backfire if the perception is you are bragging about good news most voters haven't seen.

The second big factor the Obama team needs to be (and I'm sure is) fully aware of is that the economy has real dangers still lurking ominously right around the corner. Europe's debt crisis is a big stinking mess, with the two choices for how it ends being, to paraphrase Woody Allen, between the miserable and the horrible. The best-case scenario is that the European economy lands in a tough recession, which might only be a 0.5 percent drag on the American economy -- significant, but not horrible. Horrible, on the other hand, is still quite possible, a full-blown 2008-style financial panic, which would do a lot of damage here as well as terrible damage there. And Europe isn't even our biggest economic problem: that would be our own housing market. Between the trillions in toxic housing assets weighing down (and still seriously endangering at least one of them, Bank of America) our big banks, the weight on the middle class of 25 percent-plus of homeowners in underwater mortgages, and the drag on jobs in terms of that huge sector still being so flat, the drag on our economy in that very important area remains enormous -- and dangerous. While there are some economists who think a rising overall economy will also help lift the housing sector, the opposite is just as likely true: that continued deep problems there could drag our overall economy into a deeper ditch.

So if the economy starts moving in the wrong direction because of either or both of these factors, are things lost for the Obama re-election effort? They sure don't help, but the answer is no. Here's what the Obama team needs to focus on with these dangers in mind:

1. Keep the focus firmly on fighting for the middle class. Most voters don't blame Obama for the tough times, and they are well aware that the Republicans in Congress aren't doing anything to help, but they will blame the president if they think he is not fighting hard for them while they are suffering through these bone-crunching times for the middle class. The Obama team's shift in messaging toward the Teddy Roosevelt style populism he has exhibited in the last few months is working. I am firmly convinced that this message -- in contrast to the of the rich, by the rich, for the rich campaign of Mitt Romney -- is what has driven his poll numbers in the right direction, not the modestly improving economic numbers most voters don't feel yet.

2. Keep the bragging to a minimum. I know the president's team is convinced they need to keep showing everyone the jobs chart that is going in the right direction, and of course they should talk about the good things the president has accomplished that will lay the groundwork for the future. But please, keep it to a minimum. If you do it too much, it makes voters feel like you are out of touch with what they are experiencing. The president needs to make abundantly and consistently clear that he knows what people are going through: he needs to talk with people who are unemployed, he needs to visit working class neighborhoods that are underwater in housing, he needs to talk with small business owners on the edge whose customers aren't coming in because their wages are flat. If Obama shows he knows what people are going through, and that you are fighting by their side every day, it will matter.

3. Keep the focus on housing and taking on Wall Street. If 25 percent of homeowners are still underwater in their mortgages because there have been no more write downs beyond the small $25 billion amount announced in the banking settlement, and if no or few indictments have been issued by the new financial fraud task force by the fall, I fear for the president's re-election absent a far stronger overall economy. People need far more relief on their mortgages than we got with the settlement for the housing market to really start improving, so we can only hope the settlement was the first step toward pressuring the banks for much bigger write downs. And people need to understand that the big Wall Street bankers are finally being held accountable for the fraud that they committed. If those two things came to pass, it will do the president's re-election chances a world of good no matter what else is going on in the economy.

If every jobs report over the next 8 months has at least 250,000 new jobs like the last one did, President Obama should easily cruise to victory over Romney or Santorum or whatever unlucky soul the Republicans put up. But if things take a turn for the worst, as is easy to imagine given the underlying structural problems this economic car we're driving has, it is going to be a hell of a ride. The president's team needs to hope for the best but plan for the worst, and they need to take care to not brag too much about whatever good we are seeing. They need to make damn sure the financial fraud task force succeeds, because more is riding on that than many people realize. And above all, they need to fight like bulldogs for the middle class. That strategy gives them a solid chance to win the 2012 election no matter what else happens.